## Facts

- IVF America, Inc. issued two million shares of convertible preferred stock, initially convertible at 1.1222 shares of common per preferred share.
- The certificate of designation included an anti-dilution provision requiring an adjustment to the conversion ratio if IVF issued or sold common stock for less than $8 per share.
- The certificate also contained express exceptions, including that conversions of preferred stock into common stock under the preferred security would not trigger anti-dilution adjustments.
- In October 1994, IVF offered preferred holders a time-limited opportunity to convert each preferred share into three common shares plus $0.20 in cash per preferred share; the offer expired in November 1994.
- More than half of the preferred holders accepted and converted on the enhanced terms; Brian Bernstein declined and retained his preferred shares subject to the original conversion ratio.
- Bernstein claimed the offer effectively issued common stock below $8 per share, triggering anti-dilution and requiring an increased conversion ratio for non-converting preferred holders.
- IVF argued the transaction was a voluntary conversion and fell within the certificate’s conversion exception.

## Issues

1. Whether IVF’s offer (three common shares plus $0.20 per preferred share) was a “conversion” covered by the certificate’s conversion exception or an “issuance/sale” of common stock that triggered anti-dilution.
2. If the offer was a conversion, whether the conversion exception barred any obligation to adjust the conversion ratio for non-converting preferred holders.

## Decision

- The Court of Chancery entered judgment for the defendants.
- The court characterized the transaction as a conversion of preferred into common stock, notwithstanding the enhanced ratio and cash component.
- Because the certificate expressly exempted conversions from the anti-dilution mechanism, no conversion-ratio adjustment was required for Bernstein or other non-converting preferred holders.

## Legal Principles

- Rights and preferences in a certificate of designation are construed as contractual terms and are enforced according to their plain language.
- Where an anti-dilution provision contains an explicit exception for preferred-to-common conversions, a voluntary conversion (even on sweetened terms) falls within the exception unless the instrument clearly provides otherwise.
- A court will not recharacterize a transaction to bypass an unambiguous exception and expand anti-dilution protection beyond the allocation of risk reflected in the governing security terms.

## Conclusion

The court held that IVF’s time-limited, enhanced conversion offer was a conversion within the certificate’s express conversion exception, so the anti-dilution provision was not triggered and the conversion ratio for non-converting preferred holders remained unchanged.


Bernstein v. Canet, 1996 Del. Ch. LEXIS 63 (Del. Ch. 1996)